The Hindu Business Line : Together we win

There is a story about teamwork wherein a young boy is attempting to lift a boulder in front of his father but is unable to. When the father questions whether the son has used all his strength, the son replies in the positive to which the father does not agree, as the son did not ask the father for assistance.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) — standard-setters globally and in the US respectively — have certainly displayed good teamwork in working towards a single set of global accounting standards.

While the FASB has been flexible enough to permit IFRS-compliant statements to be filed for non-US filers with a possibility of extending this to US filers in the near future, the IASB has ensured that it has kept the rule-based norms that the US is famous for when setting their standards.

One such recent standard is the proposed one on earnings per share which both have almost finalised. The FASB is amending Statement No 128 while the IASB intends to tinker with IAS 133.

The Statement

This proposed Statement clarifies that the computation of basic EPS should include outstanding common shares and instruments that the holder has (or is deemed to have) the right to share in current-period earnings with common shareholders.

It also clarifies that because the effect of certain freestanding instruments (or a component of certain compound instruments that is accounted for as if it were freestanding) that are measured at fair value each period with changes in fair value recognised in earnings is reflected in the numerator of diluted EPS, the denominator of diluted EPS should not be increased for the additional common shares that would arise from the exercise or conversion of the instrument.

Similarly, an entity would not include in the computation of basic and diluted EPS under the two-class method certain participating securities that are measured at fair value each period with changes in fair value recognised in earnings.

Method modified

This proposed Statement modifies the treasury stock and reverse treasury stock methods in three ways. First, it would require an entity to include the end-of-period carrying value of certain liabilities as assumed proceeds.

Second, it would simplify the EPS computation by requiring an entity to use the end-of-period market price of common shares in computing the number of incremental shares that would be issued upon an assumed exercise or conversion.

Third, the EPS computation also would be simplified by requiring an entity to compute EPS each period independently from any prior-period computation.

This proposed Statement requires an entity to assume share settlement when computing diluted EPS for an instrument that permits or requires either cash settlement or share settlement, unless the only circumstance that would permit or require share settlement is the legal bankruptcy of the issuer. It also clarifies the requirements of Statement 128 for allocating undistributed earnings when using the two-class method to compute diluted EPS.

In particular, an entity would adjust the numerator for the undistributed earnings associated with potential common shares or potential participating securities that are assumed to be outstanding for diluted EPS purposes, but it would not adjust the numerator by additional dividends that would be assumed to be declared for the potential common shares or potential participating securities that are assumed to be outstanding.

The Indian Experience

The Institute of Chartered Accountants (ICAI) has issued a well-drafted Convergence Report for IFRS. However, being an Act driven country, easy implementation of IFRS would need amendment of various pieces of legislation such as the mammoth Companies Act and the Income-Tax Act.

Just as the IASB and the FASB have shown, seamless teamwork works well in such situations.

(The author is a Hyderabad-based chartered accountant. Responses to blfeedback@thehindu.co.in)

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